The hidden costs of free tools - key considerations for selecting your regulatory reporting model

The shifting sands of European fund regulation 

The European asset management industry is experiencing a period of significant regulatory change. Recent developments include:

• The revision of PRIIPS (Packaged Retail and Insurance-based Investment Products) regulation, requiring standardised key information documents.  
• Updates to AIFMD (Alternative Investment Fund Managers Directive) reporting requirements.
• ESMA's ongoing efforts to standardise regulatory reporting across EU member states.
• National regulatory bodies turning to open architecture reporting channels, such as S3 API by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and ROSA portal by the L'Autorité des Marchés Financiers (AMF) in France, known as direct access solutions.

These changes underscore the need for robust, adaptable compliance solutions that can keep pace with evolving requirements.

The tech response: direct access vs. complete solution

In response to these challenges, some regulators are “leveling the playing field” by implementing open-source solutions for regulatory reporting. An example could be the S3 API direct access transmission channel by the Commission de Surveillance du Secteur Financier (CSSF). While these may seem to offer a simpler model at first glance, they often lack the comprehensive features and support that asset managers and their fund administrators actually need to report consistently, accurately and on time. 

What the changes mean for you

In theory, the shift by the regulators to open architecture aiming to digitise reporting transmission processes creates a seemingly uncomplicated solution for reporting transmission. However, there are several considerations regulators wouldn’t necessarily be aware of that firms must make before fully embracing a new operating model. 

Broadly putting the direct access model into perspective, it could be compared to a rail track taking you to a destination, without giving you any information on which train, going which direction, at what time will take you there along with the connecting journeys. On the other hand, e-file offers a train station with a complete array of destinations and facilities to facilitate your journey. All you need to know is where you want to go. 

Each model could have its benefits for the right type of user. Let’s explore the difference so you can determine the suitability of each for your organisation. 

What to look for when evaluating regulatory solutions 

The hidden functions essential to periodic regulatory reporting we categorise as compliance oversight and user functionality.

Ideally, compliance oversight includes a dashboard that offers progress tracking of all transmitted and submission-pending documents across domiciles, across providers (such as fund administrators, if present), as well as submission confirmation information (date, time, feedback from regulator). With the right solution in place, users can simply press a button to determine which documents, for which jurisdictions, are pending action or submission to the regulator. 

User functionality should include features that make lives easier, such as archive functionality for all submissions for up to 10 years and pre-defined, compliant and up to date document templates, along with permission controls down to the per-template level.

Now that we’ve covered the positives, let’s explore some of the challenges that may arise when implementing a hyper-focused solution over a comprehensive one. 

The singletrack vs. the station: challenges and considerations 

The illusion of simplicity 

While direct access provides a "rail track" for transmitting fund information directly to the regulator, it lacks crucial features that are less obvious but can prove fundamental to facilitating this already complex process. The administrative burden of setting up entities, creating profiles and buckets per reporting types, not to mention keys per bucket, will be significant. 

With regards to the CSSF's solution, fund administrators will also face the process of selecting and installing the proper user interface with which to access it. 

The resource drain

Switching to a direct access model may lead to increased time and resource allocation for managing reporting tasks internally or development of relevant functions from scratch. The API lacks the features and dedicated support compared to specialist tools like e-file. As a result, the burden will fall on IT teams to maintain and adapt to the system, sapping resources and stunting operational efficiency.

The compliance conundrum 

As an example, S3 is a CSSF domestic Luxembourg channel supporting registration and regulatory reporting procedures including those under Circular 19/708 and UCITS IV frameworks. However, for Luxembourg funds distributed across multiple European countries, a single-jurisdiction tool falls short. 

Asset managers will need to consider how they'll manage regulatory registration and maintenance of funds across multiple jurisdictions, potentially juggling multiple systems and processes.

The data management dilemma 

Direct access is a basic transmission tool which fails to offer critical data management capabilities. It lacks robust data management features including validation checks and data consistency controls. These features are crucial for maintaining high data quality and reducing the risk of errors in regulatory submissions. Without them, asset managers face increased risk of compliance issues and potential penalties.

The future-proofing fallacy 

We know from experience that regulatory requirements will only continue to evolve. The scope of regulatory reporting capabilities needs to be continuously adjusted to meet new reporting requirements, which have been known to be introduced rapidly across jurisdictions. Adapting to changes independently with a direct access API will likely require a lot of specialist knowledge and a dedication to scanning the regulatory horizon.  

Our conclusion

While the introduction of direct access by the regulators represents a step towards digitalisation and self-serve in regulatory reporting, it remains crucial for asset managers to look beyond the outside potential for short-term cost savings. The complexities of fund reporting, especially in a multi-jurisdictional context, will always require a more comprehensive approach.

Before switching to a "free" solution, consider how the resource reallocation will play out over 6-month, 1-year, and 5-year timelines. The true cost of regulatory reporting goes far beyond the price tag of the transmission tool. It encompasses the resources needed for adaptation, the potential for errors, and the ability to stay ahead in an ever-changing regulatory landscape.